Three Forces Shaping Risk Assessment Today

The underwriting market is growing more complex, facing greater data demands, rising risk volatility, and tighter capital constraints. For example, third-party litigation funding (TPLF) in the US has gone from a prohibited practice to a $15 billion market over the past 15 years and is expected to grow to over $25 billion by 2030.

New underwriting technology is opening the door to more precise, efficient underwriting, but external forces like shifting regulations are also adding more complexity to risk assessment and capital allocation.

In this article, we explore three forces currently shaping the field and reinforcing the need for more modern, adaptive practices.

1. Underwriting Technology: AI, Machine Learning, and Predictive Analytics

The explosion of data and automation is both an opportunity and a challenge. Underwriters now have access to vast datasets, including years of loss history, real-time telematics, IoT sensor feeds, social media, and AI-driven court analytics. This wealth of information offers the potential for more accurate, dynamic risk pricing, and data-driven case selection. 

However, the pace and complexity of new data sources make meaningful analysis increasingly difficult. Competitive advantage now depends on the ability to filter noise, surface insights, and apply them in context. To meet this demand, firms are investing in big data platforms, predictive analytics, and machine learning. According to BizTech, AI has helped reduce underwriting processing times in the insurance field by 31% and improved risk assessment accuracy by 43%. 

Automation is also accelerating the underwriting of legal claims. Funders are using algorithms and AI tools to evaluate case merit that draw data from court records, judicial histories, and litigation timelines. This capability has allowed funders to expand into smaller claims that were previously uneconomical to pursue, increasing both access to funding and overall case volume. As a result, funders face greater pressure to manage portfolios effectively and apply more precise risk modeling.

As AI becomes more embedded in underwriting workflows, concerns are also growing around fairness, transparency, and compliance. AI models can obscure how decisions are made, raising questions about explainability and accountability. In response, there is growing interest in Explainable AI (XAI) frameworks that help clarify how predictions are generated and what variables drive decisions. 

Bias also remains a concern, especially when models are trained on historical data that may reflect structural inequities. Regular auditing, diverse datasets, and documented governance processes are seen as essential safeguards. In parallel, the growing use of sensitive personal information such as medical records, employment histories, and financial disclosures demands rigorous adherence to evolving privacy standards and cybersecurity protocols. 

2. Regulatory Pressures: Tightening Oversight and Transparency Demands

Regulation is increasingly influencing how underwriting operates across industries. In the  insurance industry, for example, regulators are keeping an eye on algorithmic models and rate increases. Nearly half of US states have now adopted new guidelines on insurers’ use of AI, reflecting policymakers’ expectations for fairness and governance in automated underwriting. 

At the same time, insurance companies are walking a tightrope between consumer protection and insurer solvency. In 2023, after heavy underwriting losses, state regulators approved unusually large rate increases of over 20% in many cases, and even above 30% in some states. 

In the litigation finance arena, underwriting faces a very different regulatory puzzle. While TPLF has become a booming market, it still remains largely unregulated and opaque, sparking calls for transparency rules.

Regulation is also beginning to intersect with how cases are structured and funded. In class actions and MDLs, where courts act as fiduciaries for absent class members, disclosure of funding arrangements is increasing. For example, only 25 of 94 US federal district courts currently require parties to disclose litigation funding agreements, and industry groups are urging lawmakers to mandate broader disclosure and even cap the high interest rates on certain funding deals.

In February, Congressman Darrell Issa proposed the Litigation Transparency Act of 2024 (H.R. 9922), partly to reverse requiring third-party litigation funding agreements to be disclosed and produced in all federal civil litigation. According to The US Chamber of Commerce: “This legislation will help protect the integrity of our judicial system by ensuring that outside financiers are not secretly directing or profiting from litigation they are funding. It is common sense that defendants, plaintiffs, and judges should know who is seeking to profit off litigation

All this puts litigation funders on notice: the light-touch regulatory environment may soon tighten. Underwriting teams at funding firms could be forced to operate with greater transparency about their investments and possibly temper the terms they offer. 

Stakeholders have mixed feelings: many insurers welcome greater scrutiny of TPLF, blaming it for inflating claims costs, while plaintiffs attorneys may worry mandatory disclosures might give defense teams a strategic edge. Across the board, growing regulatory pressure is increasing the need for disciplined underwriting. Funders must be able to clearly justify how cases are selected and priced. Well-documented underwriting not only supports compliance, but also reinforces the funder's ability to defend its economics in a more transparent and closely scrutinized environment.

3. Macroeconomic Volatility: Economic Turbulence Upsets the Risk Equation

The broader economic climate has become a wild card for underwriting. After a decade of relative calm, the past few years have brought surging inflation, interest rate hikes, and supply chain shocks, fueling uncertainty.

This volatility makes it harder to predict future losses. Insurers price policies today to cover claims tomorrow, but when costs like auto repairs or medical care swing unpredictably, those pricing assumptions become fragile. High inflation and natural disasters have already eroded underwriting profits, pushing carriers to raise premiums sharply.

In 2023, the US property and casualty insurance industry posted a $24.5 billion net underwriting loss in the first half of the year alone, nearly matching all of 2022. According to MarshBerry’s M&A Year in Review, this was the worst first-half result in over a decade, driven by inflation, elevated catastrophe claims, and reinsurance volatility. While some relief came in late 2023 and early 2024, the pattern is clear: when underpricing persists, insurers must file for major rate hikes, tighten terms, or exit unprofitable lines.

In the world of litigation finance, new funding commitments dropped 16% in 2024, and the market shrank by nearly 30% from 2022. Many funders have shifted to “harvest mode,” focusing on existing portfolios. Those still deploying capital must be more selective and demand higher returns. 

At the same time, economic volatility has heightened financial pressure on plaintiffs’ attorneys, who operate on a contingency basis, investing out-of-pocket resources long before there is any payout. Rising costs due to inflation make this risk even greater. If a case underperforms or falls apart, the financial loss can be substantial.

Looking Ahead

Accurate underwriting means accounting for a full range of legal and operational variables, not just damages or liability. In class actions and mass torts, outcomes are not only influenced by the harm endured by plaintiffs, but by the jurisdiction, judge assignment, procedural history, and the stage at which settlement is likely. Each of these factors carries weight in determining risk and value.

Even with better data and underwriting technology tools, sound underwriting still relies on judgment. Funders, attorneys, and risk assessors must be able to evaluate whether a case aligns with strategic goals, whether its timing justifies further investment, and whether external forces, like pending regulation or public scrutiny, could shift its trajectory. Precision in underwriting requires fluency across litigation strategy, capital constraints, and emerging compliance expectations.